Archive for October, 2009

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Property market outlook is fragile

October 30th, 2009

The summer of 2009 has seen monthly reported increases in property prices, the reality is however we are in a thin market, that is to say property sales are still very low compared to historic averages. So what is the property market outlook? To help answer this question it is probably wise to consider feedback from the industry “experts”….

According to the Bank of England a total of 25,528 mortgages were approved for lending in September 2009, as fall of around 9 percent on August.  This is well down on the historic trends.

A respected economist, Howard Archer (HIS Global Insight), suggests that to stabilise the house prices we need to see between 70,000 and 80,000 mortgages approved each month.  Further the research identified that between 1993 and 2009 the average number of loans approved was 93,000 each month.

The Building Society Association (BSA) also reported that whilst “lending activity has recovered in recent months” the overall level of lending is still at levels “much below” that of previous years.

Other economists and analysts such as Seema Shah of Capital Economics suggest that there is much further to go before “lenders have the financing capabilities to loosen lending criteria meaningfully”.

Overall there seems to be a general view that we are not yet into the recovery phase of the property market, conditions are fragile and are likely to remain so for some time.

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Posted in UK House Prices

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Credit Card Debt – easy money with devastating consequences

October 27th, 2009

For too long now many banks and financial companies have marketed credit cards with extremely high interest rates and charges, and because the credit has been so easy to obtain many vulnerable people have fallen into the “credit trap”.  Companies have continued to “push” credit card debt, as highlighted by some research which identified that 5.7 million people had their credit card debt extended last year “without their prior consent”. 

It is worrying that many vulnerable people, those who are unable to manage their finances responsibly, are being given further credit, especially at such high rates of interest. But now things are set to change as the Government announce changes to the regulation of companies who provide credit card products.  In particular some of these changes will address the following points:

  • The minimum monthly payment will be increased to encourage faster repayment of debt, thus reducing the overall amount of interest paid.
  • Consumers will be given the choice to pay off more expensive debt first rather than allow charges to accrue.
  • Increases in credit limits can only be made with customer agreement.

All of the changes proposed will be subject to consultation however it is expected that the “new rules” on credit cards will be in place during 2010.

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Posted in Credit Cards

Shortage of properties to rent

October 26th, 2009

October 2009 seems to be what could be a turning point for the property rental market.  In 2008 rents started to fall across most of UK with rents in some locations, such as within central London, seeing rents achieved fall by 10%. But now the supply-demand is starting to change.

From 2008 there have been many factors causing a fall in rents:

  • Properties not able to be sold placed on the rental market creating over-supply
  • Some young adults moving back in to live with parents to save money
  • East European immigrants moving away from the UK
  • Affordability, the recession was hitting everyone’s pocket.

But in 2009 new factors are starting to play into the supply-demand equation:

  • The initial impact of properties for sale coming on the rental market has largely been absorbed
  • New build has slowed down dramatically, leading to an increasing shortage of properties.

The impact has seen the rental market start to recover with companies such as Findaproperty reporting a reduction in properties available to rent by as much as 10%.  Additionally increases in rents have been reported, averages across UK are up 0.1% in October and 1.2% in London.

It is early days to see if this is the start of a recovery in rental prices but it is looking like positive news for landlords in the months ahead.

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Posted in Buy-to-Let

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“Shock fall” in GDP of 0.4% in the three months to Sept 2009

October 23rd, 2009

The announcement that GDP fell by 0.4% in the third quarter of 2009 has taken the majority of analysts by surprise, many had been expecting positive growth of around 0.2%

Since the current recession started in 2008 we have now experienced a fall in GDP of around 5.9%, similar to the severe recession at the end of the 1970s.  Perhaps more worryingly is the fact that the economy contracted in all major sectors with production falling 0.7% and services falling 0.2%.

Some had been predicting that the bank was coming to the end of its £175bn quantitative easing programme.  But with the latest GDP figures it may suggest that there will be some more quantitative easing to follow.

If we go back to the words earlier this week from Mervyn King, then it seems that the Bank of England’s view is that we will probably return to growth in the “second half of 2009”, so we have one more quarter to go to (hopefully) see a return to growth in GDP.

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Posted in UK Economy

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Barclays – Woolwich – mortgage rates cut

October 22nd, 2009

Some good news for property buyers with new announcements made about cutting mortgage interest rates.  It would seem that market competition is starting to increase which should be welcome news for most borrowers.

Specifically the Woolwich (part of Barclays) has announced cuts of 0.6% on its 3 year and 5 year fixed rate products. If you can afford a 30% deposit then Woolwich have announced a 2 year fixed product at 3.79%.

Other banks are also cutting rates on their products, these include the Nationwide and Cheltenham & Gloucester (part of Lloyds TSB).  Even the state-owned Nothern Rock has got in on the move to cut rates, for those with 20% deposit they are offering a 2 year fixed rate of 5.69%.

In almost all cases lenders do charge fees, typically in the range £500 to £1,000. 

We do not offer any advice on mortgage products in this blog, but with rates starting to improve it could be a good time for some to discuss their options with an FSA approved mortgage broker.

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Posted in Mortgages

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FSA mortgage regulation – guidelines on assessing expenditure

October 21st, 2009

We have been taking a closer look at the FSA regulation being considered to reduce the risks in providing mortgages that may subsequently fall into arrears and have found a detailed list put forward as guidelines for lenders.

Expenditure is determined for the mortgage applicant and their dependants using 3 areas of assessment; committed expenditure, personal expenditure, and contingency expenditure.  Below is the detailed list of areas to be assessed.

Committed expenditure

Income tax and NI
Servicing of existing secured and unsecured debt
Utility bills and other household bills
Council tax
Service charges or land rent
Shared ownership rent
Cost of investment vehicle to repay interest-only loan
Insurance premiums
Pension contributions
Nursery/college/school/university fees
Alimony and maintenance payments
TV license and communication
Regular savings
Other existing commitment

Personal expenditure

Food and drinks
Alcohol and tobacco
Clothing and footwear
Household goods and services
Health and personal care
Transport
Recreation, culture, restaurants and hotels
Holidays
Other miscellaneous goods and services

Contingency expenditure

Prudent allowance for any missed or understated
expenses

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Posted in Mortgages

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FSA mortgage regulation – a step too far?

October 20th, 2009

Many industry professionals and analysts are starting to comment on the FSA regulation aimed at helping to ensure more responsible lending.  From the many comments made so far the regulation seems to be not fully thought through and will almost certainly have consequences that (hopefully) the FSA did not intend.  Here are some examples:

A self-employed person with variable income may no longer qualify for a mortgage, even though the future income is more secure than many in salaried jobs which could be at risk from redundancy.

An existing mortgage holder wanting to downsize their home and “reduce” their mortgage commitment may no longer be able to do so if they not meet the new FSA guidelines placed on banks. Is this not crazy, surely reducing the mortgage commitment actual reduce their risk of default?

An existing mortgage holder, that does not meet with the new financial guidelines, may end up “stuck” on an unattractive interest rate as they do not”qualify” for a remortgage onto a more favourable interest rate.  The regulations could allow banks to exploit this to maximise their margins!

These are just some of the examples we have seen being discussed.  Hopefully the FSA will provide further clarifications (or revisions) to their lending guidelines, if not then many more people could suffer financial difficulty at a time when we need to support them.

Based on the feedback and analysis we have seen the FSA regulation, as currently reported, does seem to be a step too far.

You can read more details on the FSA Press Release here … http://www.fsa.gov.uk/pages/Library/Communication/PR/2009/140.shtml

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Posted in Mortgages

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Mortgage ‘spending checks’, good or bad?

October 19th, 2009

The FSA are to announce that lenders must take greater measures to evaluate the spending patterns of customers before providing them with a mortgage. Is this a good or bad thing?

It is clear that in some cases people who take out mortgages will “over spend” their budgets, and there is an argument that such people should be “protected” from taking on a mortgage that they will most probably be unable to pay at a later date.

There is also an argument that this is a step to far, it intrudes into personal lives, surely how we choose to spend our money is private.  Also whilst current spending habits maybe be considered acceptable to banks, these can change, for example a change in family circumstances by financing a son / daughter through university, getting married, getting divorced, etc.

Maybe we are once again seeing centralised over-regulation as a panic reaction.  We are already increasing regulation for banks to lend more responsibly, do we need to extend this into the personal lives of everyone who wants to borrow?

What about alternatives, it seems to me that regulation of credit card facilities could be far more effective.  Maybe there could be a cap on total amount (relating to income) that an individual can have outstanding on their credit card?  The cost of a small credit card loan can soon become as expensive as a mortgage on a property.  For example:

  • Credit card debt of £20,000, interest rate of 25%, gives net cost per annum of £5,000
  • A mortgage of £100,000, interest rate of 4%, gives a net cost per annum of £4,000

This is a simplistic example but it clearly illustrates that credit card debt is far more costly to consumers and with the ease with which lenders provide these facilities then it is always going to expose the more financially vulnerable to risks at some later date.

In conclusion, maybe there should be a greater focus on the unsecured lending market where it seems all too easy to obtain credit at very high interest rates, such credit can seriously impact those who are less able to manage their spending.

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Posted in Mortgages

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Why low interests prevent many property sales

October 16th, 2009

It may seem crazy but read on and there is some good logic here that explains how low interest rates could be contributing to the lower number of properties being sold.

We blogged earlier (30th September) about property sales trends being at an historic low, and that gross mortgage lending was around 36% down on last year and around 50% of “normal” lending levels.  There are many reasons as to why there are a lower number of completions but here is a new one, well at least we have not seen anyone else report on this.

An increasing number of property owners with mortgages are now benefiting from their lender’s standard variable rate (SVR), and in the majority of cases the SVR is tracking the bank base rate (BBR) currently at 0.5%.  The upshot is that a large proportion of property owners are benefiting from SVRs in the range 1% to 3%.  However if those same property owners wanted to move home they would, in the majority of cases, end up paying a higher rate of interest on their new mortgage due to the current lending criteria. 

To put some figures on this ….

  • Lets say you are currently paying 2% on your £100,000 mortgage, that is an interest payment of £2,000 p.a. 
  • The new house needs a new mortgage, and the rate being offered is 4%, giving interest payments of £4,000 pa.
  • The net impact is your mortgage payments increase by £2,000 p.a. with the same level of mortgage

So, if you were wanting to move to a slightly bigger house, or one near to the new school, etc, then you have to factor in much higher mortgage interest costs, thus creating a big “disincentive” for moving home.  Clearly this is a simplistic example but it highlights the point, staying where you are allows you to benefit from very low mortgage rates that in many cases will be lost if you move home.

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Posted in UK Economy

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Buy-to-let mortgages, the future costs could be higher

October 14th, 2009

For over a year now it has been tough to get buy-to-let mortgages, banks have set ever higher hurdle rates for new lending; reduced LTVs, higher rental cover, and caps on the maximum number of mortgages provided. 

We took a cross-market sample of buy-to-let mortgages on offer as of 12 October 2009 to assess some of the implications, this is what we found.

  • Average interest rate 4.77%, for the first 2 years.
  • Average arrangement fees of 3.1%
  • Average LTV 68%
  • Average mortgage rate of BBR + 3.5% after 2 years.

So what does this tell us? Firstly, for the headline rates being offered of 4.77% you need to add on the arrangement fee of 3.1% averaged over 2 years, in effect giving a net cost of 6.42%. 

  • Averages allowing for fees gives an interest rate 6.42% with LTV averaging 68%

This is an extraordinarily high rate of interest given the actual BBR of 0.5% and 3 month LIBOR averaging at less than 2%.  It seems banks are “milking” buy-to-let investors, especially when you consider the average of 6.42% interest comes with an average LTV of 68%, it seems that premium interest rates are being charged for very secure mortgages.

But it is the longer term that could be of more concern.  Typically the average buy-to-let mortgage today will revert to BBR + 3.5%.  This works out at 4% based on today’s BBR of 0.5%, which seems reasonable.  But within a few years, not long after the typical initial 2 year mortgage lock-in period, BBR could be at 2% or more, thus borrowers could be paying 5.5% minimum, and this could rise to around 9% if we go back to the “normal” mortgage rates of just a few years ago.

In summary, the typical tracker mortgages with BBR +3.5% (or more) may seem cheap today but you could be locked into a very expensive mortgage as the bank base rate starts to rise (which it will) – so make sure you look after your “credit profile” should you wish to re-mortgage away from one of these products in a few years time.

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Posted in Mortgages

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